Legal practice and sole proprietorships: tax risks explained in a webinar

The practice of law and business activities involving the provision of legal or consulting services are subject to different tax regimes. Therefore, documents, invoices, payment designations, and income records must correspond to the legal status under which funds are actually received.

This was discussed during the webinar «Financial literacy skills for young advocates as the foundation for building partnerships and a brand», organized by the UNBA NextGen in the Lviv region. The event was moderated by the Committee’s regional representative Olena Orach. The speaker was financial director and finance mentor Viktoria Yasevych.

The focus was on distinguishing between an advocate’s independent professional activity and the activities of a sole proprietor. V. Yasevych noted that an advocate engaged in independent professional activity cannot be subject to the single tax. At the same time, a person who, as a sole proprietor, provides legal or consulting services to businesses may operate under the third group of the single tax system. In such a case, according to the speaker, there must not be even a hint of legal practice in the work completion reports or payment orders.

The speaker explained that advocate practice as an independent professional activity and the provision of legal or consulting services through an individual entrepreneur are subject to different tax regimes. If an advocate engages in independent professional activity, this entails an 18% personal income tax on net income, a 5% military levy, and a separate social security contribution. At the same time, for sole proprietors on the single tax, risks arise when income does not correspond to the registered KVED codes or actually involves legal practice. In such a case, this could result in the loss of the simplified tax system.

Participants were also reminded of the importance of KVED codes. V. Yasevych noted that KVED 69.10 (legal services) is the primary code for legal services. At the same time, under the single tax regime, one cannot engage in auditing activities under KVED 69.20, nor in the management and control of enterprises under KVED 70.22. If income does not correspond to the registered types of activity, this may result in the loss of single tax payer status and a transition to the general system.

The practical session focused on payment processing. If an individual entrepreneur is on the single tax system, the speaker advised specifying the payment purpose as payment for legal or consulting services in accordance with the invoice without VAT. She specifically cautioned against using the terms «salary», «advance», «barter» or «cryptocurrency» in the payment description.

V. Yasevich also emphasized that an individual entrepreneur should receive funds from clients into a business bank account, not a personal card. To avoid the need to use a cash register, she said, payments from clients should be received using IBAN details rather than a card.

Among her organizational tips, the speaker mentioned creating a digital archive of bank statements, tax returns, and work completion reports.

She recommended monitoring the status of settlements with the budget, as even a small debt or penalty could serve as grounds for revoking single-tax payer status.

In response to a question, V. Yasevich clarified that legal practice and an individual entrepreneur under KVED 69.10 are distinct entities. According to her, an individual may, as an individual entrepreneur, receive income from legal consulting services and pay a single tax on it, but legal practice is taxed separately and does not fall under the scope of individual entrepreneurship. When filing a declaration of assets and income, income from individual entrepreneurship is reported separately.